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Cost-Volume-Profit Analysis in Hospitality Operations

Explore the basics of Cost-Volume-Profit Analysis, break-even point, profit margins, fixed costs, sales strategies, and more in the context of the hospitality industry. Discover how to determine room sales targets for profitability.

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Cost-Volume-Profit Analysis in Hospitality Operations

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  1. HFT 3431 Chapter 7 Cost-Volume-Profit Analysis

  2. Cost Volume Profit Analysis • What Is the Break-Even Point? • What Is the Profit at Occupancy Percentages Above Break-Even? • How Do Increases in Fixed Charges Affect Break-Even? • How Many More Rooms Must Be Sold to Recover Cost Increases?

  3. Cost Volume Profit Analysis • How Many Rooms Must Be Sold to Reach a Certain Profit? • What Is the Effect of Profits When Prices, Variable Costs, and Fixed Costs Change? • How Do Labor Rate Changes Affect Profits?

  4. Cost-Volume Profit Assumptions • Fixed Costs Remain Constant During the Period Being Analyzed. • Variable Costs Fluctuate in a Linear Fashion With Revenues. • Variable Costs Are Constant on a Per Unit Basis.

  5. Cost-Volume Profit Assumptions • Productivity Remains Constant. • Revenues Are Proportional to Variable Costs. • There Are No Volume Discounts.

  6. Cost-Volume Profit Assumptions • All Costs Can Be Broken Down Into Their Fixed and Variable Components. • Joint Costs Are Not Eliminated When One Department Is.

  7. CVP Basic Formula • How Much Should Be Charged to Break-Even? • 10 Room Motel • Variable Costs Are $5 Per Room • Fixed Costs Are $2,500

  8. CVP Basic Formula • 250 Rooms Will Be Sold • SP = VC Per Room + (Fixed Costs / Number Rooms Sold) • SP = $5 +( $2,500 / 250) • SP = $15 Per Room

  9. Most Common Expression of CVP Analysis Is a Graph

  10. Most Common Expression of CVP Analysis Is a Graph

  11. Most Common Expression of CVP Analysis Is a Graph

  12. Most Common Expression of CVP Analysis Is a Graph

  13. Most Common Expression of CVP Analysis Is a Graph Loss but cover FC Profit Breakeven Loss

  14. CVP Basic Formula • How Much Should Be Charged to Earn $2,000 in a 30 Day Period? • 10 Room Motel • Variable Costs Are $5 Per Room • Fixed Costs Are $2,500

  15. CVP Basic Formula • 250 Rooms Will Be Sold • SP = VC Per Room + (Profit + FC) / Number Rooms Sold • SP = $5 +( $2,000 + $2,500) / 250 • SP = $23 Per Room

  16. Most Common Expression of CVP Analysis Is a Graph

  17. CVP Formula for Single Product Analysis • I = Net Income • S = Selling Price • X = Units Sold • V = Variable Costs Per Unit • F = Total Fixed Costs (Plus Profit)

  18. CVP Formula for Single Product Analysis • SX = Total Revenue • VX = Total Variable Costs • Basic Formula for Break-Even (Income Equals 0) • 0 = SX - VX - F

  19. Break-Even Formula Variations • Units Sold at Break-Even • X = F / (S - V) • Fixed Costs at Break-Even • F = SX - VX • Selling Price at Break-Even • S = (F / X) + V

  20. Break-Even Formula Variations • Variable Cost Per Unit at Break-Even V = S - (F / X) • Most Hospitality Operations Sell Multiple Products. Therefore, We Need Additional Tools.

  21. Contribution Margin • Contribution Margin (CM) Is the Selling Price, or Sales, Minus the Variable Cost(s). • Contribution Margin Percentage (Ratio) Is the CM Divided by the Selling Price (or Sales).

  22. Contribution Margin • To Get Break-Even in Units, Divide the Fixed Costs by the Contribution Margin. • To Get Break-Even in Sales Dollars, Divide the Fixed Costs by the Contribution Margin Percentage.

  23. Contribution Margin • Since Our Products Have Different CM, We Use CM Percent (Weighted) a Lot.

  24. Weighted Contribution Margin Percent • The Contribution Margin Percent, or Contribution Margin Ratio (CMR) Says That the Amount Available to Cover Fixed Costs Is the CMR Times the Sales Dollars.

  25. Weighted Contribution Margin Percent • The Weighted CMR Is Computed As Follows: • (Total Revenue - Total Variable Costs) / Total Revenue

  26. Weighted Contribution Margin Percent • Another Way of Looking at it is to Take the Sales Mix Percentage for Each Area (Which in Total Must Add up to 100%) and Multiply That Percentage by the CMR for the Particular Area. Then Add All Results to Get the Weighted CMR.

  27. Weighted Contribution Margin Percent • Divide the Weighted CMR Into the Fixed Costs (and Profit if Applicable) and the Result is the Required Sales Level.

  28. Margin of Safety • Excess of Budgeted or Actual Sales Over Sales at Break-Even • Expressed in Units or Dollars

  29. Sensitivity Analysis • Study of the Sensitivity of Dependent Variables to Changes in Independent Variables • Looks at the Incremental Number of Units Required to Sold to Cover Additional Costs

  30. Operating Leverage • Extent to Which Expenses Are Fixed Rather Than Variable • Highly Levered When Fixed Costs to Variable Costs Is High • Highly Levered Means a Small Increase in Sales Yields a Large Profit (Above Break-Even)

  31. Assignment • None

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